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better bid appeared before the NCS stockholder meeting to vote on the merger. When
Omnicare made a topping bid at more than double the price per NCS share offered by
Genesis, litigation to invalidate the lock-up ensued.
In November 2002, Vice Chancellor Lamb rejected the challenge to the lockup,
based on the somewhat unusual facts of the case: NCS had been thoroughly shopped,
Omnicare had been unwilling to make a firm bid, and NCS was in precarious financial
condition. However, in December 2002 a divided Delaware Supreme Court issued an
order invalidating the deal protection devices.
Lock-Ups and the Unocal Test
In its April 4, 2003 opinion, the court reviewed the lock-up arrangements under
the Unocal "proportionality" test, which examines whether a board’s response to a
reasonably perceived threat — in this case, agreeing to the lock- up provisions to keep
Genesis from making good on its threat to walk from the deal — was reasonable in
relation to the threat. The court explained that Unocal requires a two-part inquiry: to
sustain merger protection devices, the court first must determine that the devices are not
"preclusive" or "coercive," and then determine that they are within a "range of
reasonable responses" in relation to the threat posed.
The court found the lock-up to be both preclusive and coercive. According to the
majority, the lock-up arrangements "accomplished a fait accompli" and were "designed
to coerce the consummation of the Genesis merger and preclude the consideration of any
superior transaction.” The court noted that the combination of the § 251(c) provision,
the voting agreements and the absence of an effective fiduciary out made it impossible
for the Omnicare transaction or any other transaction to succeed, "no matter how
superior the proposal."
Fiduciary Out Required
The court also found the lock-up to be invalid on a separate basis: it prevented the
NCS directors from exercising their continuing fiduciary duties to minority stockholders.
By agreeing to the fully locked-up deal, the NCS board "disabled itself from exercising its
own fiduciary obligations at a time when the board’s own judgment is most important,
i.e. receipt of a subsequent superior offer."
Acknowledging that boards may agree to merger protection devices that are
"economic and reasonable," even if they increase the cost to a competing bidder, the
majority stated that defensive measures "cannot limit or circumscribe the directors’
fiduciary duties," which the court described as "unremitting.” The court held that the NCS
board had no authority to approve a merger agreement that prevented it from executing
125
Omnicare made a topping bid at more than double the price per NCS share offered by
Genesis, litigation to invalidate the lock-up ensued.
In November 2002, Vice Chancellor Lamb rejected the challenge to the lockup,
based on the somewhat unusual facts of the case: NCS had been thoroughly shopped,
Omnicare had been unwilling to make a firm bid, and NCS was in precarious financial
condition. However, in December 2002 a divided Delaware Supreme Court issued an
order invalidating the deal protection devices.
Lock-Ups and the Unocal Test
In its April 4, 2003 opinion, the court reviewed the lock-up arrangements under
the Unocal "proportionality" test, which examines whether a board’s response to a
reasonably perceived threat — in this case, agreeing to the lock- up provisions to keep
Genesis from making good on its threat to walk from the deal — was reasonable in
relation to the threat. The court explained that Unocal requires a two-part inquiry: to
sustain merger protection devices, the court first must determine that the devices are not
"preclusive" or "coercive," and then determine that they are within a "range of
reasonable responses" in relation to the threat posed.
The court found the lock-up to be both preclusive and coercive. According to the
majority, the lock-up arrangements "accomplished a fait accompli" and were "designed
to coerce the consummation of the Genesis merger and preclude the consideration of any
superior transaction.” The court noted that the combination of the § 251(c) provision,
the voting agreements and the absence of an effective fiduciary out made it impossible
for the Omnicare transaction or any other transaction to succeed, "no matter how
superior the proposal."
Fiduciary Out Required
The court also found the lock-up to be invalid on a separate basis: it prevented the
NCS directors from exercising their continuing fiduciary duties to minority stockholders.
By agreeing to the fully locked-up deal, the NCS board "disabled itself from exercising its
own fiduciary obligations at a time when the board’s own judgment is most important,
i.e. receipt of a subsequent superior offer."
Acknowledging that boards may agree to merger protection devices that are
"economic and reasonable," even if they increase the cost to a competing bidder, the
majority stated that defensive measures "cannot limit or circumscribe the directors’
fiduciary duties," which the court described as "unremitting.” The court held that the NCS
board had no authority to approve a merger agreement that prevented it from executing
125
